The Wall Street Journal did an analysis of comments by Federal Reserve members and judged the accuracy (article). “Hawks” are thought to be more aggressive anti-inflation policy authorities than “Doves”. I find it interesting that they go so far as to judge a winner in this situation. Long run outcomes are still not known and would be an important part of scoring who was “right”. But there are a few other issues here as well.

First, I think the overall decision function of the two sides does not get adequate attention, for they are surely very different. An inflation “hawk” has one overarching concern that dominates any other considerations: keep inflation low. At some level the “hawk” dismisses the unemployment rate and other measures as irrelevant to their goal of low and stable inflation. Notice the article mentions that the comments of “Hawks” move markets more than “Doves.” The signal from “Hawks” is clearer to markets because of their sole focus. As a result, the “Hawks” will be more willing to be inaccurate on other measures so long as it does not interfere with their estimates for inflation. The “Doves” have a more flexible outlook and are willing to accept higher inflation if they judge the benefits to other measures, the unemployment rate for example, are worth it. In general then, the “Dove” is tracking more measures, and has an interest in those measures, being more accurate.

Second, the timing of the decisions has to come into play. I think “Hawks” are more likely to have problems with accuracy in the recent five year period. Their vigilance against inflation forces them to look at the potential for inflation, from sources such as funds available to loan by financial institutions. Whether these banks are making loans or not matters to both sides, but a “Hawk” views this with more concern than a “Dove”. In the immediate aftermath of the crisis demand was low, but there were several measures indicating a rapid turn was possible if the economy improved.

A third issue is the overall composition of the Fed. Ideological entrenchment can vanish quickly when crisis occurs. One of the unfortunate facts for both sides in this situation is that the Fed is very limited as far as direct support for aggregate demand. Low interest do not matter much to the unemployed. Banks do not care to lend, regardless of borrower creditworthiness, when all asset values are suspect.

There will be more to come from this I am sure. The “Dove” v. “Hawk” split has never suited my impressions of the Fed. It is a bit too simplistic and fails to account for subtle distinctions between Fed members.

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